Can a bankruptcy trustee sue general partners for outstanding liabilities?
UPDATED: January 30, 2020
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Federal business bankruptcy law states that the general partners of a business partnership may be sued by the trustee of the bankruptcy court if the partnership can't pay its debts during a bankruptcy filing. However, each individual partner may only be sued personally if he or she has signed a personal guarantee of partnership debts.
What Is the Role of the Trustee During a Bankruptcy Filing?
During a business bankruptcy, the trustee is responsible for overseeing the bankruptcy process. He or she acts on behalf of the creditors to ensure distribution of the bankruptcy estate. This means that the job of the trustee involves collecting and handing out any available money to creditors.
While managing the bankruptcy and financial transactions, the trustee is legally allowed to file a lawsuit against the general partners when it's discovered that the assets of the partnership are less than the amount owed to all of their creditors. The lawsuit will be filed by the trustee on behalf of some or all of the creditors.
This type of lawsuit can and often does liquidate the partnership itself. If the company can't pay its debts, a lawsuit can't lead to distribution unless liquidation takes place. When the trustee sues the partnership, the court assists with the process of selling off whatever assets the business owns in order to pay creditors, effectively halting the operation of the partnership.
When Can the Trustee Sue the General Partners?
It is important to note that just because the trustee can sue the general partners, doesn't necessarily mean he can sue each individual partner. Partnerships are separate legal entities and the partners themselves can't be held responsible for debts unless they sign a personal guarantee. However, many creditors require that at least one of the partners sign such a guarantee, and if so, that partner can be sued personally.
If you are involved in a business bankruptcy filing, it is a good idea to contact a lawyer who can help you understand your rights and protect your personal assets.